Grand Rapids, Mich.-based Spartan Stores Inc., a leading regional grocery distributor and retailer, on July 28 reported financial results for its 12-week first quarter ended June 18, 2011.
Consolidated net sales for the 12-week first quarter increased 4.4 percent to $602.6 million compared to $577.2 million in the same period last year. Both the distribution and retail segments reported improved sales during the quarter.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) for the quarter increased 6.7 percent to $24.6 million, or 4.1 percent of net sales, compared to $23.0 million, or 4.0 percent of net sales in the year-ago period.
First quarter operating earnings increased 4.9 percent to $14.0 million compared to $13.3 million in the year-ago period. Last year’s first quarter included a net pretax charge of $0.6 million comprised of a $2.6 million restructuring charge related principally to the warehouse consolidation initiative and a LIFO inventory valuation credit of $2.0 million due to the lower inventory levels as a result of the consolidation.
“We are pleased that our first quarter fiscal 2012 financial performance was in line with our expectations,” stated Dennis Eidson, Spartan’s president and CEO. “We achieved year over year sales growth for the third consecutive quarter in our distribution segment while continuing to enhance our value proposition to the consumer and tightly managing the controllable aspects of our business which resulted in improved profitability in our retail segment.”
In the first quarter of fiscal 2012, the Michigan Legislature enacted the new Michigan Corporate Income Tax. This new tax replaces the Michigan Business Tax (MBT), effective Jan. 1, 2012. As a result, first quarter fiscal 2012 earnings included a one-time, non-cash income tax charge of $0.5 million due to the write-off of net deferred tax assets and liabilities related to the MBT that will no longer be realized as a result of the elimination of this tax. Once implemented, the impact of the new tax code should result in an annual decrease in income tax expense of approximately $0.5 million. Excluding the $0.5 million tax charge in the first quarter of fiscal 2012, the company’s effective income tax rate was 38.5 percent versus 39.1 percent last year.
First quarter earnings from continuing operations as reported were $6.1 million, which was comparable to the prior year. Excluding the previously mentioned one-time, non-cash income tax charge in the current year and the pre-tax items associated with the warehouse consolidation initiative last year, adjusted earnings from continuing operations for the quarter increased approximately 3.0 percent to $6.7 million compared to $6.5 million last year.
Net earnings for the first quarter of 2012 were $6.0 million compared to $6.0 million last year. Excluding the previously mentioned one-time, non-cash income tax charge in the current year and the pre-tax items associated with the warehouse consolidation initiative last year, adjusted net earnings increased 2.7 percent to $6.5 million, or $0.29 per diluted share, compared to $6.4 million, or $0.28 per diluted share, in the first quarter of fiscal 2011.
First quarter gross profit margin decreased 110 basis points to 20.8 percent from 21.9 percent in the same period last year. The decline was due to a higher mix of fuel and distribution sales in this year’s first quarter compared to the prior year, a LIFO charge of $0.7 million this year versus a credit of $1.8 million in the prior year due to the warehouse consolidation, as well as, a lower rate of procurement related gains.
Operating expenses totaled $111.3 million, or 18.5 percent of net sales, compared to $113.3 million, or 19.6 percent of sales in the year-ago quarter. The adjusted first quarter operating expense-to-sales ratio was 18.5 percent this year versus 19.2 percent, excluding the previously mentioned net pretax restructuring charge related to the warehouse consolidation initiative, last year. The Company’s expense leverage was improved by a shift in mix of sales towards fuel, productivity improvements in each segment, favorable health care expenses and general cost containment initiatives which were partially offset by higher debit/credit card fees.
Distribution Segment
First quarter net sales for the distribution segment increased 4.8 percent to $257.1 million from $245.3 million in the year-ago period due to new customers, improvement in pharmacy related sales and increased sales to existing customers.
Operating earnings for the segment decreased 7.3 percent to $7.4 million compared to $8.0 million in the same period last year. Adjusted for the prior year net restructuring costs, operating earnings were $7.4 million this year compared to $8.5 million last year. The decrease in earnings was due to a lower rate of procurement gains, increased LIFO expense and the cycling of a favorable settlement of a claim in the prior year.
Retail Segment
First quarter net sales for the retail segment increased 4.1 percent to $345.4 million compared to $332.0 million in the same period last year. The higher sales were due primarily to increased fuel retail selling prices and volume, partially offset by a decline in comparable store sales, excluding fuel, of 0.9 percent.
Retail segment operating earnings for the quarter increased 23.0 percent to $6.6 million compared to $5.4 million in the year-ago period. The increase in operating earnings was attributed to lower health care expenses and benefits from cost containment initiatives, partially offset by increased debit/credit card fees.
Balance Sheet and Cash Flow
The company continued to report strong levels of net cash provided by operating activities of $6.7 million for the first quarter of fiscal 2012. Current year cash flow was lower than the prior year due to increased working capital as a result of higher sales and the payment of fiscal year 2011 incentive compensation.
As of June 18, 2011, total net long-term debt (including current maturities and capital lease obligations and subtracting cash) was $137.0 million versus $173.5 million at the end of the first quarter of fiscal 2011. The company’s total net long-term debt-to-capital ratio is 0.31 to 1.0 for the first quarter of fiscal 2012 and the net debt-to-Adjusted EBITDA ratio on an annual Adjusted EBITDA basis is at 1.3 to 1.0.
Outlook
“The Michigan economy has shown some improvement from its previous lows to a more stable level. However, this improvement has been mitigated by higher fuel prices, which impacted consumers’ discretionary income, and an uptick in the unemployment rate over the last two periods of the quarter,” Eidson said. “Looking forward, we continue to expect comparable store sales to turn positive in the second half of the year as we benefit from cycling fiscal 2011’s competitive store activity, we continue to execute our capital investment program, we rollout our loyalty program across the remaining banners and the economy continues to experience inflation. As a result, we remain cautiously optimistic about our operating outlook and expect continued improvement of our key financial metrics in fiscal 2012.”
The company expects that the second quarter distribution sales growth and retail comparable store sales rate, excluding fuel, will be comparable to the first quarter of fiscal 2012. The company expects fiscal 2012 second quarter adjusted net earnings to approximate last year’s adjusted performance. Excluding the 53rd week in fiscal 2012, the company continues to expect comparable store sales to turn positive in the second half of the year. For the full fiscal year, the company anticipates that adjusted net earnings, excluding the 53rd week, will modestly exceed fiscal 2011’s.
The company continues to expect capital expenditures for fiscal 2012 in the range of $42.0 million to $45.0 million with depreciation and amortization in the range of $36.0 million to $38.0 million and total interest expense approximating $15.0 million.
Spartan Stores Inc. is the nation’s eleventh largest grocery distributor with 1.4 million s.f. of warehouse, distribution and office space located in Grand Rapids. The company distributes more than 40,000 corporate and national brand products to approximately 375 independent grocery stores in Michigan, Indiana and Ohio, and to its 97 corporate-owned stores located in Michigan, including D&W Fresh Markets, Family Fare Supermarkets, Glen’s Markets and VG’s Food and Pharmacy.
